As the saying goes, “A new month starts with a good start”. The Straits Times Index (STI) started the month of March 2017 on an upbeat note. At the time of this writing on March 01, the STI has risen by 29 to 30 points intraday at around 3,125, and it looks set to close the quarter on a high note if nothing goes wrong in the next few weeks as we round off the March quarter.
Given the STI’s high correlation with the US markets, and index futures, it is no surprise that the overnight news on the Dow Jones Index (DJI) hitting above the 21,000 target got investors feeling all excited again. Immediately, the morning of March 02, the STI opens up with as much as 30 points increase due to pent up demand of stocks by investors before settling in at around 14 to 15 points higher at 3,139 in the afternoon hours. The index started to fade away close to the market close and is up by mere 7 points.
How did the STI perform intraday
The Average Directional Index (ADX) has been moving on a flat line with positive directional indicators (DIs) outpacing the negative DIs. The Relative Strength Index (RSI) (not shown) is trending close to the higher end of 70 which is in the ‘overbought’ region. We think that should there be a pullback in the index, we think that the next support line is 3,025 on the 20-day moving average (MA). Should there be a significant upside, the STI could test the 3,200 level.
Semiconductor space is the main focus
The FTSE ST Technology Index has been tracking on the downside for much of last year since it hit the peak of 299.47. The trough was 213.7, and the peak-to-trough is about three months starting from September 2016 to December 2016. The index started to rise on reports of increased corporate spending on information technology (IT) tools, and robust electronics exports growth.
An example to illustrate the growth of the electronics industry is via the Electronics Purchasing Managers Index (PMI)
The Electronics PMI spent most of the time last year treading underwater (below the 50 breakeven mark), and the first time, the Electronics PMI broke the 50 level mark came in August 2016 when it rose to 50.2. Subsequently, the Electronics PMI rose sharply and the last reading in January 2017 was 51.8 from 51.2 in December 2016. The Electronics PMI is said to be one of the leading indicators to gauge the performance of the electronics manufacturing industry, and the signs of growth looks intact.
The latest Electronics PMI for February 2017 fell 0.4 points to 51.4. The fall is expected due to seasonality factors where Lunar New Year festivities fell in early February and some companies cut back on production schedules due to the long holiday break. Nonetheless, the current and forward trends are still showing some upside in the months ahead.
Venture tops the electronics peer group
At the time of this article on March 03, Venture Corporation Ltd’s stock price has breached the $11 mark to hit $11.13 before coming back down slightly to $10.96. The ADX (bottom of the main chart) is trending upwards at 37.09, and is at the upper end, with positive DIs outpacing the negative DIs. According to information obtained from SGX Stockfacts website, the stock is currently trading at 17 to 18 times historical price-earnings (P/E) ratio, and dividend yield is 4.5 per cent. On the margins side, Venture’s historical gross margins and net margins have been in the 23 to 24 per cent range for the former, and 5 to 6 per cent for the latter.
The average analysts’ rating for Venture Corporation Ltd is ‘Outperform’ with a 12-month price target of $11.538 per share, and of the 13 analysts surveyed by Reuters.com, 12 of them were bullish about the stock.
UMS Holdings is not far behind
UMS Holdings is a $296.1 million Singapore headquartered semiconductor company specialising in providing precision machining components and equipment modules for semiconductor equipment manufacturers. The stock is also thriving with its low historical P/E of 13 to 14 times and almost no debt. The company’s gross and net margins average around 54 to 55 per cent for the former, and 20 to 30 per cent for the latter.
According to information provided by Reuters.com, the consensus analysts’ estimate for the stock is an ‘outperform’ rating with a target price of $0.775 versus the current price of around $0.69 to $0.70 per share. The company is also debt-free, and these dividends are paid out yearly at around $0.04 to $0.06 per share.
Disclosure: I personally owned 300 shares of UMS Holdings
Hong Kong’s Hang Seng Index takes a breather
Moving on to the chart showing the Hang Seng Index (HSI) in Hong Kong, it looks toppish, but in recent weeks, the chart appears to have fallen slightly from the recent peak of 24,216.53. Using the Fibonacci Retracement analysis, we noted that the index is now on sliding towards the 78.6 per cent retracement point, with further declines being seen as a possibility.
The ADX at the bottom of the chart also showed similar downward trends with negative DIs outpacing the positive DIs. On the valuation multiple of HSI, the historical P/E is around 11 to 12 times, and despite the positive correlation of the monetary policies in Hong Kong to that of US, the general market is still relatively cheap as compared to US markets.
S&P 500 continues to soar
The S&P 500 ended the trading week with the index reading of 2,383.12. or 0.05 per cent higher intraday on Friday, March 04. Market action on Friday was largely dominated by what US Federal Reserve Janet Yellen has to say about future rate hike possibilities going forward, and there are strong hints that the next hike is expected to be an aggressive one. The next meeting of the Federal Open Market Committee (FOMC) is March 14 – 15, 2017.
Currently Federal Funds Futures, or Fed Funds futures are pointing an almost 80 per cent certainty of a 75 to 100 basis points (bps) increase in Federal Funds rate come March 14 and 15, 2017.
Over the week, investors also witnessed the Dow Jones Industrial Index crossed the 21,000 psychological mark, after having crossed the 20,000 level in late January, President’s Trump speech which was thought to be lacked on specifics, and the robust debut of Snap Inc. (formerly Snapchat) IPO. Looking at the current one-year daily S&P 500 chart shown earlier, the pace of increase seems relentless, with no lookback. The ADX is also showing extreme positivity. However, trading volume levels are low as the index heads higher suggesting that the US markets in general is getting relatively expensive. The current market P/E is currently at a historical 26 to 27 times, and is much expensive as compared to the Hang Seng and other international markets.
How did our investment portfolio perform
Our investment portfolio achieved a gross total return of 6.9 per cent since inception at the end of November 2016. This compares to the STI benchmark return of 7.5 per cent during the same time period. The STI closed the week at 3,122.34, and is up by 8.4 per cent on a year-to-date basis. For the week, the STI is up by 0.4 per cent. The major local news dominating the headlines has been the ongoing uncertainties of the fortunes of Ezra, and the bankruptcy of its joint venture (JV) subsidiary EMAS Chiyoda Subsea (ECS). The uncertainties have also spilled over to the banks and their exposures to Ezra’s woes. However, the three banks’ stock prices managed to end the week relatively unchanged to slight declines.
What to look out for next week
On the local economy front, investors would be looking out for Singapore’s foreign exchange reserves count on Tuesday, March 07, and retail sales on Friday, March 10. The forecast for February is $357.4 billion for foreign exchange reserves, while retail sales for the month of January is expected to show a slight decline of 0.6 per cent, and 0.3 per cent on a monthly and yearly basis. Investors would also be keen to look for further signs of improvement in US job figures when it will also be released on March 10. The consensus forecast for February non-farm payrolls is 186,000 and unemployment rate to decrease slightly to 4.7 per cent. January’s actual unemployment rate is 4.8 per cent.
What would I be following in sector picks for March
Regular readers who have been following my monthly newsletters, and blogs would have known that I am currently keeping tabs of what is going on for stocks in the oil and gas (O&G) sector with Ezion being my favourite small-cap pick, and Keppel Corp being my blue chip pick.
Lately, I have also added semiconductor industry as a sector to watch and I am closely monitoring two players, namely UMS Holdings, and Fischer Tech. According to SGX Stockfacts, UMS Holdings trades at a historical 13 to 14 times earnings, and Price-to-book (P/B) value of 1.6 times. It has almost zero debt, and generates positive free cash flows each year. The company is in the business of offering high precision front-end semiconductor components.
As for Fischer Tech, the stock is currently trading at 8.4 times, and P/B of around 1.0 times. It has low debt levels, and positive free cash flows each year. The company manufactures and sells precision engineering plastic components for electronic products in China.
With the ongoing stability of the electronics PMI shown earlier, we feel that the semiconductor industry has some room to grow. The growth does come with risks, as semiconductor cycle is usually short, and sometimes volatile. But, we feel that with the ongoing development towards artificial intelligence (AI) technologies, autonomous vehicles, and robotic manufacturing, the semiconductor industry does present investors with opportunities.
Disclaimer: The views/analyses expressed by the author in this article are based on public information sources, and individual analyses. These views do not necessarily represent the views shared by my principal firm. Investors seeking to trade in the stocks mentioned in this article are advised to seek the opinions from licensed financial advisers.